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Monday, January 28, 2013 - 06:00
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Monday, January 28, 2013 - 06:00

Opening Range Breakout: A System That Offers Signals for Quick Profits

Monday, January 28, 2013 6:00 AM

The opening range breakout strategy is one of the first day trading strategies explained in detail for individual traders. In 1990, Toby Crabel wrote a book called Day Trading With Short Term Price Patterns and Opening Range Breakout.

This book has been out of print for years and it is rumored that Crabel would not give permission for a second printing because he was profitably managing money with the strategies. Copies are occasionally available for prices starting at several hundred dollars on Internet auction sites.

The book describes very specific rules for trading several markets, rather than a general but practical overview like this article offers.

Traders using the opening range breakout strategy calculate the opening range, which is the difference between the highest price and the lowest price in the first few minutes of trading. Common time frames are the first 15 minutes or the first 30 minutes of the trading day, although longer or shorter periods can be used.

If the price moves significantly above or below that range, then traders expect to see follow through and will place orders to enter trades near the high and low of the opening range.

How traders use it
An example of the opening range breakout strategy can be described with a few rules:

1. Calculate the opening range. For example, if the high is $102 and the low is $98 in the first 15 minutes of the trading day, the opening range would be equal to $4.

2. The size of the range is added to the high and a buy order is placed at that price. In this example, $4 is added to $102 and a buy order is placed at $106.

3. Subtracting the range from the low provides the short entry point. In this case the trader would enter an order to go short at $94, which is $4 below the low of the opening range at $98.

4. If prices fall back to the middle of the range, then the trader would close their position with a loss. In this example, a long trade entered at $106 would be closed at $100 and a short trade entered at $94 would be closed with a loss at $100.

5. All trades are closed at the end of the day.

There are many possible variants of these ideas. The time frame could be changed in step one. A multiple of the range could be changed in steps two and three. For example, aggressive traders might use a multiple less than one (like 0.5) to generate more trades while more conservative traders might use a larger multiple (like two) to trade only the strongest trends. Stop-loss levels can be varied in step four and profit targets could be added as exits in step five.

Why It Matters To Traders
The opening range breakout strategy has been widely used by traders to profit from intraday moves.

Action to Take --> This is also an ideal trading system for day traders with full-time jobs. All of the required data is known shortly after the market opens, 15 minutes after the open in the example shown. Orders can quickly be calculated and entered with a broker so that traders can profit from intraday trends without having to monitor the market all day.

This article originally appeared on ProfitableTrading.com:
Opening Range Breakout: A System That Offers Signals for Quick Profits

[Note: My colleague Amber Hestla of ProfitableTrading.com has put the finishing touches on a report that answers ten commonly-asked questions about boosting income with options. If you'd like learn more about generating income using options, simply click here and tell us where to send the report.]

Michael J. Carr does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.